Price threats persist, despite subsiding inflation

Overall consumer price pressure continued to ease through the summer, but remains a real threat to consumer spending in certain categories and a re-emerging threat in food and fuel.

Despite the subsiding price pressure, expect the Federal Reserve to remain intent on raising interest rates to forestall the threat of future inflation. This means that economic growth will feel all the downside and little of the upside that typically comes from low inflation.

The downside remains most evident in retail goods categories—where sales are depressed by downward price pressure and hurt by spending pulled away toward essential categories such as health care where inflation is focused. For more on the latest retail sales trends, see this post.

Here is more on what the latest numbers say about:

Overall inflation. After topping 2% through the start of the year, core consumer inflation has slipped to 1.7% in recent months as measured by the Consumer Price Index—and inflation is even lower as calculated by the PCE measure tracked by the Federal Reserve.

The food & fuel threat. The benefit consumers received from lower prices for food and fuel in 2016 continues to be slowly erased—which will squeeze spending in other categories. Food and beverage prices are now flat compared with a year ago. Energy prices are now up slightly after double-digit declines in 2016.

Prescriptions. Prescription drug prices remain another key threat to spending in other categories. These prices were up a full percentage point month-to-month in June, which pushes inflation in the category up to 3.8% year-to-year and 4.5% YTD.

Apparel. Apparel prices remain weak. They slipped lower month-to-month in June and are down nearly a percentage point year-to-year. On a year-to-date basis, apparel prices are flat from the prior year.